Beyond Merit Increases: All the “Other Stuff” Really Does Matter

In the recent years, most companies have been deciding on funding a base salary merit increase pool of 3%. While numbers have been adjusted up or down slightly, sometimes including an additional 1% for promotions, we have settled into an almost “fixed” annual salary adjustment program. Despite well designed merit programs, including merit increase matrices, detailed manager guidelines and thorough performance management training programs, the real effect has been very minor salary adjustments for most, driven by managers’ struggle to differentiate among employees.

Employees have grown accustomed to these annual increases, reaching a high level of expectation which creates increased pressure on managers to deliver at least some adjustment for all but the poorest of performers. In fact, many of these poor performers should probably have been terminated, but by retaining these employees, the mangers have “someone” to deliver a zero increase to meet the expectations of HR and senior management to differentiate performance.

So, what do we do? How do we continue to push for pay for performance cultures and recognize and reward the key employees driving success for the firm?

Many companies are enhancing the tools for managers, an expanded merit matrix, increased or decreased performance categories, and forced performance rating distributions. While these are not revolutionary practices, in most cases these are new to the company and have been met with varying levels of success. And with the merit increase pool remaining around 3% most companies are continuing to struggle to differentiate pay.

This struggle to differentiate pay is highlighted in the World at Work 2016-17 Salary Budget Survey (Which you can find here.)83% of employers identified small (1.25x average) to moderate (1.5x average) variation of pay increases. While on the surface this sounds reasonable and meaningful, let’s delve deeper into the numbers. At 1.25x of average salary increases, with a salary adjustment budget of 3%, variation for performance results in an increase of 3.75%. A moderate variation of 1.5x, results in an increase of 4.5%. This amounts to a modest at best differentiation and sends very mixed messages to employees. A 25% premium for differentiated performance results in an annual base salary increase of $1,903 (3.75% x the average US salary of $50,756) or $79 per semi-monthly paycheck. On an after-tax basis, the “above average” employee is receiving an approximate increase of just over $51 per semi-monthly paycheck. How do we expect to motivate and incent a “pay for performance culture” with $51? This annual increase buys ONE DINNER FOR FOUR AT APPLEBEES. Hardly what the above average employee would consider a meaningful reward.

So, with limited funds for salary adjustment, some companies are turning to variable pay programs. As noted in the World at Work 2016-17 Salary Budget Survey, 84% of the surveyed companies are now using variable pay vehicles. However, these programs are typically representing an incremental cost and are challenging for mid-size and small companies to fund.

What are we to do? We clearly need to stay focused on performance management and linking rewards in the most effective way possible. The real key is to pay attention to all the “other stuff”.

Making personal connections with employees. This is what really becomes meaningful during these more challenging periods of limited merit increase dollars. Establishing a purpose beyond just the job description serves as a powerful motivator for increased commitment and effort in performing one’s job. Defining purpose begins with a connection with employees through clear communication of the company’s vision. This communication should begin with senior leadership articulating the business strategy for the firm. Working through the organization levels the vision should be explained at increasing detail articulating how the division and then department goals support to meet the corporate strategy. Employees can then understand how their role contributes to the firm’s overall success. This connection to the organization clarifies purpose and provides motivation to deliver performance above expectations.

Defining purpose leads to creating a meaningful culture and sets the work environment as a key differentiator for all employers. This starts with front-line supervisors ensuring they are paying attention to what and how employees are feeling and in turn able to contribute to the company’s goals. Yes, the message is simple and not new but requires consistent effort. The “other stuff” or non-compensation reward programs create the culture and define your company’s work environment.

Many programs have been introduced over time including employee recognition, employee of the month, peer recognition programs, professional development programs, coaching and mentoring programs. The most effective action, however, can be direct interaction with supervisors and employees. On-the-job training, timely and consistent feedback and direct mentoring are critical to establishing the employee’s connection with the firm. These soft elements of the employee value proposition can have an outsized positive impact on your employees’ relationship with the firm. It is through this on-going dialogue with the employee that the relationship grows enhancing the linkage and commitment of the employee and their willingness to make contributions above expectations.

So, continue to develop new and enhance existing compensation programs, but don’t forget the “other stuff”. Value it and get front-line managers to focus on building the employee relationship through consistent interaction and clear communication.